When it comes to running a successful business, having an effective marketing strategy is essential. As part of that strategy, it is crucial to determine a marketing budget prior to executing marketing initiatives. Calculating a marketing budget should be a top priority for any business looking to maximize their marketing efforts.
When calculating a marketing budget, it is important to take into account factors such as available resources, target audience, and other budgetary constraints. It is also important for businesses to assess their current marketing efforts and determine where additional funds could be allocated to increase their reach and effectiveness. This blog post will provide an overview of why calculating a marketing budget is so important and outline key considerations to keep in mind when developing such a budget. We will also discuss strategies for allocating funds and maximizing the impact of your marketing budget.
How to Calculate Your Marketing Budget
Why do businesses need a marketing budget?
Businesses require a marketing budget because it aids in preventing problems with money. A company can use additional funding throughout the fiscal year with little risk to the company’s finances if it is well prepared for a campaign. A company’s ability to hire more personnel during slow times or prepare more equipment for production or service lines can benefit from extra capital from financial planning.
A department or business can determine how much money to set aside for salaries, equipment, office space, marketing initiatives, and design changes with the help of a well-developed marketing budget. It can provide a company with potential flexibility when managing projects and altering any particulars that call for budget adjustments. Having a marketing budget enables teams to prepare for successful projects that increase a company’s profits.
What is a marketing budget?
A marketing budget is the sum of money that a company allots to various costs associated with marketing its goods or services. These budgets may be used by either specific departments or the entire company. Typically, businesses set aside a certain amount of money for marketing on an annual or quarterly basis. All projects or departmental activities that teams intend to develop during that time period are typically included in marketing budgets. Budgets can be used to create plans for production, partnerships, advertising campaigns, construction expansions, and staff hires because marketing budgets cover every aspect of a business.
What to consider when calculating a marketing budget
When determining a marketing budget, a company’s various factors should be taken into account, such as:
The amount that department heads can spend on marketing initiatives depends on how much money their company makes. Business leaders can estimate how much money they actually have and how much they may accumulate during the fiscal year by calculating both gross and estimated revenue. The amount of money made by the business before any deductions or allowances is known as gross revenue.
Taxes, rent, and the cost of goods sold are among the items that qualify as deductions and allowances. Estimated revenue is the sum of money that business executives believe their organization will earn over a specific time period. Budgeting, calculating tax liabilities, and creating shareholder issuing statements may all benefit from knowing the estimated revenue.
Leadership evaluates the total costs of the company per quarter when preparing a marketing budget. Internal teams, contractor groups, part-time employees, and departmental expenses are among them. Before allocating the marketing budget, leaders assess all costs, including those of departments that are unrelated to marketing.
Any revenue used by the business for outside hiring or other out-of-office activities is referred to as external expenses. When establishing a marketing budget, business leaders also take outside costs into account. Trade shows, training sessions, employee events, milestone celebrations, and external employee meetings are a few examples of extra costs. Any costs incurred by outside organizations or consultants that a business leader uses to upgrade the facility can also be considered external costs. These can be upgrades like antivirus software, website development, or building work.
A company may need different types of marketing depending on its size and age. New businesses typically require more marketing initiatives and campaigns in order for marketing teams to build a brand audience and attract devoted clients. Businesses with more than five years of publicity have a more established brand presence, depending on previous marketing strategies. A marketing budget can still be beneficial for an already established company so that it can continue to expand.
Company executives look at their department’s previous marketing plans before deciding on a marketing budget. They can build a simple model using previous marketing strategies. A new marketing requirements plan can be created by new businesses or businesses with different expectations for their marketing plans at the start of their first working quarter or fiscal year. As circumstances and projects change, consider holding regular meetings to adjust, increase, or reallocate the marketing budget needs.
Leaders can create a suitable budget by figuring out how many projects or campaigns take place during the allocating period. Leaders may, if possible, add additional funds to the budget so that marketing teams have a flexible fund to meet their needs. They can use this to effectively market their company to potential customers and employees.
How to create a marketing budget
Consider the steps below if you want to learn how to make a marketing budget:
1. Understand customer needs
Consider doing some preliminary research on the clientele to learn more about who a company is marketing to. Knowing the needs of your target market can help you determine which marketing strategies to use. For instance, if a business is selling a product to children, spending money on television ads that target children may increase sales. In addition to age, there are other factors about a customer base to take into account, such as where they live or the brands they already use.
2. Evaluate revenue
Find out the revenue expectations and actual revenue for the period in which you want to develop a marketing budgeting plan. Gaining insight into the company’s revenue can help marketing teams with decision-making by providing them with useful information. For instance, it may be beneficial to transfer funds from underperforming departments to those that require additional support.
Marketing teams may be able to spend money on advertisements, materials, and new hires more wisely by continuously learning about the company’s revenue. While evaluating revenue, consider extra costs outside of marketing. These might include loss of sales, property damage, or a shift in the market sector. Teams can better allocate large sums of money to prepare for the unexpected by taking into account unforeseen circumstances that have an impact on their business.
3. Examine customer goals
Meet with the board of directors, investors, and members of the marketing team to determine the customer goals for the marketing, sales, and HR teams after evaluating usable revenue. You can more easily create a budget for a given business period if you are aware of the crucial objectives for each department. Planning for a number rather than a general factor is a more actionable goal for a team. For instance, if a team states they want to create a marketing plan that brings 200 new customers, the question for your marketing budget is, “How much money do we spend to get 200 new customers?”
4. Measure the average cost per lead
The cost per lead (CPL) measures how much money a business must spend on marketing to generate a lead. Divide the amount spent on leads by the quantity of leads those funds produced to determine the CPL. Your CPL, for instance, would be $10 if you spent $1,000 on 100 leads. You can use this formula to determine the CPL for various channels if the company employs multiple marketing teams. These specific computations can assist marketing teams in distributing budget amounts among channels. The formula for CPL is below:
Amount spent on leads/generated leads = CPL
An organization can learn from a CPL calculation how well each team generates leads at any given time. A marketing manager can calculate historical data using CPL to determine whether marketing teams are improving over time. Marketing managers can benchmark CPL data over time as a company gathers it to make accurate forecasts. Business leaders can compare various lead turnover rates to those from various departments using CPL data. This can assist in identifying the marketing initiatives that yield the highest returns on investment.
5. Determine the average conversion rate
While calculating leads can be helpful for a company’s productivity metric, knowing how many of those leads convert to customers can be an even more beneficial calculation for your budgeting strategy. Count the sales and leads over a certain period of time to calculate the rate of business conversations. Convert the result to a percentage after using the average conversion rate formula. The conversion rate formula is:
Number of sales/number of leads = Average conversion rate
For instance, a company’s conversion rate is 10% if it receives 10,000 new leads for a product and converts 1,000 of those leads into customers. Using a lead calculator and a conversion formula, a company can identify the most profitable marketing channels. Utilizing these formulas on a weekly, quarterly, or annual basis can produce useful data that enables targeted improvement. Using this information, business leaders can determine which departments need more resources to reduce turnover.
6. Consider how many leads the business needs
For the purpose of calculating lead requirements, it helps to know how many customers the business wants. Divide the new customer goal by the typical conversion rate to calculate the number of leads required for a company to meet its customer goals. Dividing the new customer goal by the average conversion rate is one of the simplest ways to calculate how many leads a channel needs. The formula for this process is:
Customers wanted/average conversion rate = Needed leads
Consider, for instance, a business that desires 100 clients and has a 10% average conversion rate. The calculation to determine lead needs is following:
100/0.1 = 1,000
This demonstrates to the business that in order to reach their goal of acquiring 100 new clients, marketing teams must generate at least 1,000 new leads.
7. Calculate final conversion costs
You can use the CPL calculation to determine how many leads a business needs to generate in order to reach its objectives. Finding the minimum sum that the business must invest in order to achieve desired sales can be done by using this formula a second time. The formula for calculating a final conversion cost is:
Needed leads x cost of lead = Marketing budget minimum
Consider a business that needs 2,000 new leads. The average cost to generate each lead is $100. A marketing manager multiplies the quantity of leads by the cost of each lead to determine this company’s final conversion cost, resulting in a minimum marketing budget of $200,000 overall. The calculation for this scenario is:
2,000/$100 = $200,000
How do you calculate a marketing budget?
You multiply that by your ideal or historical average customer acquisition cost to get the cost. Consequently, your planned expenditure for your conversion goal is $100 if your average CAC is $10. Therefore, the marketing budget for a team with a $10,000 annual operational expense would be $11,000.
How much should I budget for marketing?
Depending on a company’s size, growth stage, and the impact of marketing on sales within the company’s industry, among other things, a marketing budget typically ranges from 5 to 25% of a company’s revenue or revenue targets.